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Following recent news on China implementing a 10% tariff on US LNG effective September 24th, please find a commentary from Giles Farrer, research director, Wood Mackenzie:

"In the 12 months up until June 2018, China was the second largest buyer of US LNG, accounting for approximately 3 mmtpa of US LNG, with Shell being the largest seller. However as the US-China trade dispute escalated, Chinese buyers have gradually reduced purchases of US LNG.

"The impact on the short term market is likely to be less than we previously indicated. This is partly because the level of the tariff is lower than initially proposed, 10% now vs 25% in August, but also because we think China has already completed the majority of its procurement for winter. Possibly because of this, we have recently seen spot and futures prices for winter come down despite strengthening oil prices.

"If China still needs to procure spot cargoes, we think that this is likely to result in a premium of up to 10% on supply from non US, lean sources like the Australia East Coast projects, Tangguh, Gorgon or the Qatari Mega-trains. Chinese buyers' appetite to pay significantly higher prices for LNG from other sources may be limited by the price they can sell gas domestically.

"For the long-term market, the consequences are likely to be felt on new supply developments. It restricts the target market for developers of new US LNG projects trying to sign new long-term contracts. However there is still plenty of appetite for second wave US LNG projects from other buyers in Asia and Europe, as evidenced by recent contracting momentum at Freeport, Calcasieu Pass and Sabine Pass Train 6. The first wave of US LNG projects were successful despite not signing contracts with Chinese buyers.

"It could also support development of other projects outside of the US targeting the Chinese market (including Russia pipeline projects), potentially allowing them to push for higher long-term contract prices. The recent deal between PetroChina and Qatar is evidence of this."

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China to implement 10% tariff on imports of US LNG

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Summary

Following escalation of the trade dispute between China and the US, China has implemented a 10% tariff on US LNG imports effective 24th September. In line with other commodities, we expect the tariff to be applied inclusive of costs up to delivery into the port in China (including shipping, port and canal charges). Implementation of the tariff will have consequences both for short term spot LNG prices and also long term LNG supply development.

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China's tariffs on US LNG

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The trade war between the US and China could intensify. On 3 August 2018, China unveiled plans to put tariffs on US$60 billion worth of US goods as a proposed retaliation measure against recent US tariff proposals. This includes a 25% import tax on US LNG into China. What are the implications? If implemented, the impact of a tariff would be different depending on whether LNG is sold via existing contracts, new contracts or spot trade.

Summary

In August, LNG imports were up by 52% year-on-year, bringing year-to-date imports to 33 Mt, up 48% year-on-year. This is despite higher imported prices, as LNG is needed to fill the gap between ever-rising gas demand and underperforming pipeline supplies. The 10% tariff on US LNG is unlikely to alter this growing trend. We now expect 2018 incremental imports to reach another record high. On the back of a firmer outlook for domestic demand, NOCs have resumed contracting activities.

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